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​​​System Failure

Regular reserve studies and funding aren't enough to cover the increasingly common threat of infrastructure failure. How do we fix the system before more tragedies strike?

By Tyler P. Berding, Esq.

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​A BALCONY COLLAPSE on a multifamily building in Berkeley, Calif., in 2015 killed six people and left seven others severely injured.

The building was only 8 years old and had been inspected several times during and after construction. The balcony was four stories above the sidewalk. A soffit without ventilation enclosed the supporting joists. A membrane intended to keep the framing dry covered the walking surface.

The waterproofing didn't work. W hen the building was completed and after, water seeped beneath the membrane at the door threshold and into the wood framing that held up the balcony. In just eight years, the accumulated moisture rotted the supporting timber to the point of failure.

The visual inspections done during construction weren't adequate enough to ensure that the waterproofing was installed correctly. Later, inspectors couldn't see the hidden rot that led to joist failure because those structural components were enclosed.

A few months after the Berkeley tragedy, a steel staircase collapsed on a Sacramento, Calif., apartment building and crushed to death a man walking beneath it. The beam where the stairs were attached was rotted around the mounts and failed.

In 2019, a balcony collapsed on a two-story condominium building in Mountain View, Calif., injuring five people. Rotted framing components were the cause.

A few days after the Mountain View collapse, a two-story balcony collapsed on a Wildwood, N.J., condominium, injuring 19 people. Again, rotted framing was the suspected cause.

These are not isolated incidents. After the Berkeley collapse in 2015, the Chicago Tribune researched the problem and estimated that at least 6,500 people had been injured in balcony collapses since 2003.

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Most community associations are relatively young. The vast majority were developed during and after the 1970s. With structures that young, why should we worry about the failure of essential components? Many communities have conducted regular reserve studies or use other means of projecting the cost of long-term maintenance and repair. If so, doesn't that mean funding for all maintenance and repairs is adequate? Not likely.

Concern for the longevity of essential building components has been rising in recent years. Abnormal or unexpected wear and tear is often discovered during otherwise routine maintenance. Dry rot in structural components like balconies and walkways, not noted during regular inspections, has led not only to unexpected repair bills but also severe threats to occupant safety.

Hidden damage need not injure people to decimate a community association. Rot in wood components can lie undetected for decades until it is discovered during routine maintenance or when a component fails.

These maintenance and repair surprises are not limited to exterior wood components. Rot can be found inside wall cavities where it has been hidden for years, slowly compromising the framing of the building. Plumbing and electrical systems can reach the end of their service lives with no one knowing it until failure occurs. Defects in foundations from soil subsidence can progress slowly for years without discovery until they fail to support the structure.

The expense of dealing with these issues, when finally discovered, can be catastrophic.

FACING HARD REALITIES

Because owners are being hit with large special assessments to address unexpected maintenance more frequently, the Foundation for Community Association Research reached out to board members, owners, community managers, and other professionals to determine the severity of this problem and the level of awareness that exists nationwide. The study consisted of questionnaires, personal interviews, and case studies. Forty-seven community associations across the nation were surveyed. The results are eye-opening.

Breaking Point: Examining Aging Infrastructure in Community Associations details why the unanticipated expense of repairing hidden damage can be so overwhelming. Much was already known. Boards of directors and owners are reluctant to raise assessments, even to stay ahead of inflation. When money is tight, reserve funding is usually the first to go. “Borrowing" from reserves to pay operating expenses is not unusual, even if it is not portrayed as such. Reserves are cut back to meet the available assessment funding. If reserves for known future maintenance are inadequate, there's no consideration of funding for unknown or hidden problems.

Some findings of the study: 81% of the respondents reported unanticipated infrastructure issues in the past three years. Eighty percent identified having adequate reserves as their number one concern. Of those, half of the respondents identified deteriorating infrastructure as a top concern. Half of the respondents also reported that their reserve funding would be inadequate to address any significant unplanned component repair.

Part of the problem identified by the study arises from inadequate inspections of infrastructure. You can't predict the condition of something you cannot see.

Because of the Berkeley tragedy, California recently enacted balcony safety legislation (Civil Code Section 5551) that requires periodic intrusive inspections of components designed to support human occupancy—balconies, stairways, and similar components. Depending on the design of the component, these inspections may be expensive, since structural supports often are hidden under soffits or other coverings. But without direct visual observation of the actual load-bearing components, any assessment of condition or useful life is speculative and unreliable as a basis to determine adequate reserve funding.

Another issue is communication with members. Owners naturally resist increased regular or special assessments. Boards and managers must compile enough information about the condition of the buildings so owners will understand why increased funding is necessary.

Finally, the study found that retaining the right experts is critical to determining the condition of the building and preparing a plan for dealing with any unexpected results. This also includes maintaining relationships with banks to access additional funding when regular or special assessments are inadequate for the necessary tasks.

DIVERGING INTERESTS

So, what do these findings tell us? Some of the study's recommendations, while logical and obvious, are rarely followed. Why?

Without delving too deep into the community association psyche, owners' differing interests are often to blame. The majority of condominium owners are transient—they don't intend to live there forever. People get married, have children, or change jobs. Elderly owners move to assisted living. The average length of condominium ownership is thought to be seven years.

Short-term ownership means these owners' views on maintenance, repair, and the reserves necessary to pay for them often reflect those individual circumstances. Their willingness to pay for projects that may not occur for a decade or more is limited. Those owners who do intend to live there for many years and are willing to invest in future maintenance are often in the minority.

MAINTAINING VALUES AND ASSESSMENTS

A property's appraisal value is skewed by hidden conditions and rarely reflect the state of an association's financial situation or the adequacy of its reserves for maintenance and repair.

A unit listed for sale is inspected by a home inspector usually hired by the potential buyer. But what does that home inspector inspect? Not the entire project, and he or she will rarely, if ever, analyze the reserve account.

Buyers' home inspections are usually limited to the interior of the unit and, at most, general observations of the exterior. Why? Because inspectors typically know that with a condominium at least, the association is responsible for all common area maintenance and repairs, so hidden damage or repairs for which there are inadequate reserves are rarely noted in an inspection report.

Concealed issues that should affect the value of the property are unknown to the buyer and, thus, have little or no impact on the sales price. With each sale there is no “true-up" where the price the buyer pays reflects deferred maintenance or inadequate reserves. The buyer unknowingly inherits those issues.

The true cost of ownership, i.e., the expense of repairing hidden damage that, if known, would be borne by the current owners, is instead passed through a series of owners until it is ultimately discovered—perhaps many years later. Prior owners do not pay the future cost of restoring the buildings when unanticipated damage is discovered. They have sold their interest and moved on.

Deferred or hidden damage also does not occur all at once. It happens over many years during the period of ownership of many previous owners. When that damage is discovered, late in a project's life, it is always the present owners stuck with the tab—usually a special assessment or higher regular assessments to amortize a bank loan to fund the repairs. Many owners who pay for these repairs feel justified in blaming prior boards and management for failing to identify evolving problems early enough to repair them inexpensively.

Owners also are interested in keeping assessments low since that is one of the few housing costs they can control. Mortgage, tax, and insurance payments are fixed. But community association assessments are set by the board of directors, and board members, like owners, do not want to raise assessments any more than necessary. Community politics place boards under constant pressure to keep regular assessments low and avoid special assessments. Owners have recalled boards for no reason other than imposing assessments the owners believed unnecessary. The result is a growing gap between repair expenses and available funding.

Boards of directors, managers, and other professionals must consider the long-term needs of the association and not succumb to the political pressure asserted by owners or individual board members. The “client" of the manager, legal counsel, or reserve analyst is not an individual member or even the board of directors. The client is the corporate association, and its interests are very long-term.

One of the primary responsibilities of every community association board is to protect and sustain the infrastructure to benefit present and future owners. They fail that responsibility if maintenance of the infrastructure is deferred or damage remains undetected.​

ADDRESSING DEFICIENCIES

Among the Foundation report's recommendations are that boards commission more frequent and thorough inspections. If discovered early enough, most hidden damage can be remedied at a reasonable cost. Left undiscovered or inadequately addressed, these conditions become very expensive to repair.

Consider recaulking flashings every few years versus the cost of replacing an entire balcony or entry structure. It is wrong to deliberately pass catastrophic repair costs to future owners if early detection might allow cost-effective maintenance now.

The survey is the first of its kind to collect national data that supports the findings and opinions above. It has taken many years for the industry to learn that “fund-as-you-go" maintenance of infrastructure often leaves an association and its members in the intolerable position of funding very expensive repairs that should have been discovered and dealt with years earlier.

It also points out that even where an association implements periodic reserve studies, unless those studies consider possible hidden issues, they will not be adequate. This can easily happen even when the law mandates reserve studies. In California, a reserve study is required every three years, but the statute limits the components surveyed to those that are “visible and accessible," so damage hidden in areas not readily accessible are not studied.

California's balcony safety legislation is a good start since it will require inspection of hidden areas to evaluate the safety of various exterior structures. That will alert boards and managers to conditions they should address now, even if they do not place occupants in imminent danger. This new awareness will mean fewer dangerous conditions, more proactive maintenance, and will spread the cost of ownership over generations of owners instead of just those there when a catastrophic problem appears.

Tyler P. Berding is a founder and principal of Berding Weil law firm in California. He serves on the Foundation for Community Association Research's Aging Infrastructures Task Force. tberding@berdingweil.com​